Many of the investment management theories were found worthless in an investment climate which is characterized by innumerable number of investment opportunities with differing categories of risk. This has led the investors to think about collective investment to set off the risk from one investment with the return from another investment. This was formally called portfolio and many theories have been developed thereafter to facilitate portfolio management. This paper discusses some of the important concepts of modern portfolio management. The paper takes a descriptive approach where all the concepts are described in such a way how they are useful for investors.
Investors always seek for an optimal investment portfolio where the returns are more and risk is less. This can be met through Portfolio Theory. The Theory helps in developing an optimal portfolio that will enable an investor to optimize market risk and generate more return from the business. Thus Portfolio theory is an approach to manage risk and return. The Theory has got much relevance in of financial management literature as many investors found them effective means of increasing the return at a given risk level. The theory is basically applied to the stock market and is based on the idea that there are basically two kinds of risk: (a) diversifiable or relevant risk (risk associated with events occurring in individual companies such as strikes, new marketing programs, lawsuits and new inventions (b) non diversifiable or market risk (risk associated with factors that affect all companies such as inflation, war and recession (Elton, 1999). The careful construction of portfolio of securities helps investors to reduce the diversifiable risk to zero and optimize the market risk. However the market risk cannot be eliminated as it is uncontrollable one. And to the investment managers it helps to meet the